Cost-Benefit analysis.

• Author: Pope, Devin B.
• Position: Money Talk

The Social Security Act, created in 1935, has been amended over the years but is still a major income component during retirement. Understanding and choosing a Social Security benefit can be one of the most important retirement planning decisions you make. However, many retirees do not undersland the complexities of the options available to them.

Early Benefit

The earliest you can start receiving Social Security retirement benefits is age 62. Some people may not have an option to delay taking benefits. However, for those who don't need the income now they may be better off by waiting. The age 62 benefit may be 30 percent lower than their full retirement benefit. Also if you plan to continue to work, your early benefit can be reduced even further. If you change your mind about taking an early benefit and are within the first 12 months, you can repay what you have received and restart your benefit at a later date. After 12 months, you can wait until full retirement age and then suspend your benefits. The income stops, but your benefits will begin to grow and a higher benefit can be taken in the future.

Full Retirement Age Benefit

The full retirement age benefit was originally established to be age 65. However, in 1983, an amendment was passed to increase the fa retirement age from 65 to 67, beginning in the year 2000. Today, full retirement age is based on the year in which a participant is born. A full retirement age benefit will be significantly greater than an early benefit on a monthly basis--but it isn't the maximum benefit you can receive. Your full retirement benefit will grow by roughly 8 percent for every year you wait until age 70. Those who have the option to wait past full retirement age will receive a healthy annual growth rate on their benefit.

Breakeven Analysis

A breakeven analysis is an important tool when trying to determine when a benefit should be taken. This analysis illustrates how many years it takes before waiting for a benefit pays off. By taking an early benefit, at age 62, you receive a benefit for more years but at a reduced rate compared to the full retirement age benefit. So at what point does waiting pay off? A high-level breakeven analysis suggest that an individual taking their full retirement age benefit would have to live at least 12 more years to breakeven versus the age 62 benefit. Someone considering the age 70 benefit would have to live roughly 13 more years to breakeven versus the full retirement age...